“There is a misnomer that because of low labor costs, Indian manufacturing is very competitive,” says Goenka.
Industry players largely want to do what is good for India, even if there are exceptions, they believe. Dr. Pawan Goenka, Chairman, Steering Committee for Advancing Local Value Addition and Exports (SCALE). While the committee is dispensing sector-specific policy advice, it has also identified the ‘horizontal promoters’ that India needs to fix to become more competitive across the board, including the cost of doing business. He said in an interview that excessive logistics cost and import duty on raw materials and machines as well as over-regulation are areas of concern. Hindu.
Edited excerpt:
What are the major challenges facing Indian manufacturing?
Our primary focus is on how to make Indian manufacturing competitive in terms of cost. There is a misnomer that due to low labor cost, Indian manufacturing is very competitive. This is a misnomer, as there are a number of factors that offset that advantage and make our manufacturing non-competitive in many areas. There are some composite themes that run across almost all sectors… We are putting this under the umbrella of cost of doing business. We talk a lot about ease of doing business, but India’s biggest problem is lack of scale. The industry needs to come forward and invest in a big way and the government needs to facilitate this with a viability gap. But primarily, the foot in the industry is on the way to invest in a big way as China did. Second is the cost of land, which is one of the world’s most expensive industrial land, and electricity, which is the world’s most expensive industrial power, part of which is cross subsidized. But now in the competitive world, the Indian manufacturing industry cannot afford the burden of cross subsidy. The third is the cost of capital. If you exclude the current low cost of capital due to COVID-19 and low interest rates, the cost of capital in India is 20% to 30% higher than the cost of capital in most other countries that are exporting. These are our factor costs. The third area that is well accepted, but we haven’t been able to make much progress, is logistics cost. According to government data India’s average logistics cost is 13% of revenue when the global average is 8%. Hence India suffers 5% loss due to logistics cost. Obviously the loss in labor cost cannot be compensated by the industry. The fourth area is labor productivity and skill which is primarily the responsibility of the industry. The fifth area is to strengthen the Micro, Small and Medium Enterprises (MSME) sector because while the scale will be created by large companies, they cannot do everything themselves without a strong MSME sector. The focus of the government should always be on strengthening MSMEs, working closely with the industry. It’s not about giving any kind of financial leverage… it doesn’t make them strong, but a good technique and skill base will be there. Although we have improved the ease of doing business, for manufacturing, we still need to do a lot.
How was your interaction with various ministries?
His personal involvement has been intense even after Commerce and Industry Minister Piyush Goyal constituted the committee. He has spent at least two hours with us in more than 15 meetings related to different fields. I recall a meeting in which six or seven ministers attended for more than two hours to see all the details of the recommendations. Mr. Goyal has also personally taken up matters with other ministries for our views to gain traction and for horse-trading to change policies and rules. Committed champions across sectors have been instrumental in diagnosing and resolving challenges – for example, at AC, we had Panasonic India CEO Manish Sharma, FICCI and DPIIT additional secretary Anil Agarwal, who combined to deliver the results . DPIIT, in fact, does a lot of important background work to coordinate with other ministries. The contribution of all the members of the SCALE committee, who are giving significant personal time to this effort on a voluntary basis, also cannot be overlooked.
India has been raising import duties in recent years to reduce imports. Is this the right way to become self-reliant?
The SCALE panel is not in the mindset of increasing the tariff. Our emphasis is on how to make Indian manufacturing more competitive, so as to reduce the need for imports and increase the opportunity for exports, not by artificially raising tariffs or imposing non-tariff barriers. In some cases this may be necessary for the short term, but increasing tariffs basically raises consumer prices. We have drawn a line that we don’t want to do anything that will increase consumer prices. In fact, we have sought reduction in tariffs in several sectors to make Indian manufacturing more competitive. Further, while the need for more favorable Free Trade Agreements (FTAs) in terms of exports comes up time and again, we believe that it is important that India is not at a disadvantage as compared to other countries in terms of FTAs. And today, along with many countries in Europe, South East Asia, Middle East Africa, India is at a disadvantage as compared to other countries with more favorable FTAs. So our request is made only to see that instead of saying ‘let’s get lowest tariff’ to export everywhere, something can be done to make India a level playing field for the disadvantaged.. This is clearly not practical and feasible. Tariff reduction is always two-way. India cannot seek entry for Indian exports and continue to have high duties on imports.
Vietnam, now one of our major manufacturing competitors, has already sealed FTAs with the UK and EU…
Before the COVID pandemic, India was a $2.87 trillion economy with manufacturing exports of around $229 billion, with manufacturing accounting for about 43% of the total exports. Now for India to see itself as a manufacturing country and achieve a good balance between manufacturing and services, it is important for manufacturing exports to be high. In terms of manufacturing exports as a percentage of exports, Vietnam, for example, is 80%, Malaysia 70%, Thailand 56%. The flip side is that whatever is exported from India is often a low value-added export. India is very poor in hi-tech, with exports from hi-tech sectors contributing only 10%, which is a very disappointing number. Vietnam is 40%. Malaysia is 52%, Thailand is 23%. So, my concern is not so much about the overall manufacturing exports as the number will be lower due to the very strong service economy. My concern is that hi-tech exports are very low and often, we export commodities or raw materials instead of exporting value-added products. Over the past decade, Vietnam has focused heavily on exports and much of China’s manufacturing has moved to Vietnam, which is often owned by Chinese companies, but in any case, Vietnam has value addition. Today, Vietnam’s manufacturing exports are identical to India’s in absolute terms. So even though Vietnam’s economy is 1/10th the size of the Indian economy, exports remain the same.
The target of reaching manufacturing exports of $1 trillion by around 2027 is very good and India deserves it. But it will not be with business as usual. Some tough decisions have to be taken, some priorities have to be given, some more compromises have to be made. Because to get something you have to give up something again and again. Sometimes you can have everything.
Third, for market access through FTAs and preferential trade agreements, what we are looking for is no harm. Fourth is technology and quality. We know that India’s research and development (R&D) spending is the lowest at only 1.5%-1.6%, as opposed to 3.5-4%, which is the global average. And more importantly, the industry is not interested enough in R&D, but has to come forward and invest more. Lastly, Brand India is not strong enough for manufacturing overseas. It is known more for cheap products rather than excellent products, which is a misconception. And we need to change that.
Given the challenges of aligning industry factions and convincing government officials, do you have moments when you think – ‘what have I found myself’?
No, I am personally enjoying it. I am exploring a whole new world beyond autos and tractors. All my life, I have worked in autos for 41 years with 10 years on tractors, and what I am getting is an exciting world outside of autos and tractors. I also get it: Yes, of course, all companies want to do well. But overall, even if there are exceptions, companies want to do good for the country. Okay, and this is the wish – is there a way that I’ll be able to add value to the country, without compromising on my company’s requirements. Atma Nirbhar Bharat is a very inspiring slogan. I am having a lot of fun learning about all these industries and interacting with players… The auto industry has been respected by most industries because of what they have done over the past 25 years. Luckily, I’m well known because the auto industry gets a lot of exposure on TV and print media, so I get a little bit of my point and they listen to me. It helps as if some unknown person would be doing this, it would be difficult to align all.
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